November 19,2004

Grassley Expresses Concerns Over European Actions to Reinvigorate Trade Disputes

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, has expressed his disappointment to outgoing European Commission Trade Commissioner Pascal Lamy regarding the European Commission’s recent actions relating to disputes over repeal of the ForeignSales Corporation/Extraterritorial Income Act, trade in bananas, and trade in beef treated withgrowth-promoting hormones.

“(A)fter completing this tremendous legislative effort with respect to FSC/ETI compliance,it seems that we’re right back where we started before Doha – facing the prospect of continued litigation and increasing tension over beef, bananas, and FSC,” Grassley wrote. “That is unfortunate. For instead of looking ahead together to the substantial work that remains to bring the Doha Round to a successful conclusion, the Commission’s actions divert precious energy and resources on both sides of the Atlantic, over issues that should have been resolved long ago. Nevertheless, I intend toengage your successor in an effort to minimize these distractions and advance a positive tradeagenda, both bilaterally and multilaterally, over the coming years.”

The text of Grassley’s letter to Lamy follows.

November 18, 2004

The Honorable Pascal Lamy
Member of the European Commission
B-1049 Brussels

Dear Commissioner Lamy:

Thank you for the courtesy of your letter dated November 5, 2004. Your remarks underscore howimportant it is that we maintain and respect the rule of law in our bilateral and multilateral traderelations. I have worked hard to advance that respect. I also believe it is important that we doeverything we can to resolve outstanding bilateral trade disputes in a thoughtful manner, so we canfocus our efforts on developing a mutually supportive trade agenda. That’s why I’m troubled bysome recent actions taken by the European Commission. I share my concerns with you out ofcourtesy, as I intend to raise them with your successor at the earliest opportunity.

First, I am deeply disappointed by the request for consultations in the FSC/ETI dispute under Article21.5 of the WTO Dispute Settlement Understanding (“DSU”). There is simply no basis forperpetuating this dispute any further. I am confident that upon review, our grandfathering of legallybinding contracts will be upheld. As my staff has indicated to yours, to the extent these contracts areleases they are not implicated by the WTO decisions on FSC/ETI. Leasing is a service and the WTOdecisions do not address services. To the extent these contracts are other than leases, they must belegally binding as of September 17, 2003, in order to be grandfathered. That means grandfatheredcontracts will not have any impact on future trade–if the contracting parties are not legally bound asof September 17, 2003, they cannot claim a continued benefit. This is consistent with a fundamentalrationale for the DSU, which is that a compliance effort should not be punitive. In addition, thesystem is self-policing. Parties claiming a continued benefit must demonstrate to the InternalRevenue Service that it derives from a legally binding contract entered into as of September 17,2003. Absent that demonstration, the benefit will be denied.

Now, I understand that the Commission has indicated there is no linkage between the request forfurther consultations under Article 21.5 and the recently initiated Airbus dispute. However, earlierindications from the Commission clearly suggested that any decision to challenge our FSC/ETIrepeal legislation would be linked to whether the United States initiated WTO dispute resolutionprocedures against Airbus subsidies. I fail to see why our decision to exercise our legitimate rightsagainst Airbus subsidies should drive a decision to pursue Article 21.5 proceedings in an unrelatedcase. To the extent it did, I very much hope that such linkage will not serve as precedent in thefuture.

Second, I am extremely troubled by the announcement on October 27, 2004, that as of January 1,2006, the European Union will impose a tariff of 230 euros per metric ton on banana imports thatdo not originate in African, Caribbean, and Pacific (“ACP”) countries. As you know, in April 2001the United States and the European Union reached an Understanding on Bananas in an effort toresolve the ongoing WTO dispute over trade in bananas. As part of that Understanding, the UnitedStates agreed to a temporary tariff-rate quota through 2005, under which the most-favored-nation(“MFN”) rate of duty is 75 euros per metric ton while ACP bananas may be imported duty-free. TheUnited States agreed to this lengthy transition period in order to afford ACP countries and the EUsufficient opportunity to adjust to a final tariff-only regime. A final tariff rate was not specified atthat time. However, in November 2001, the United States agreed to the EU’s request for a WTO waiver from the MFN obligation found in Article 1 of the General Agreement on Tariffs and Trade (“GATT”) based on the understanding that the final tariff rate would “at least maintain total marketaccess for MFN banana suppliers.”

Now, you don’t have to be a trade lawyer or an economist to see that increasing the MFN duty onbananas by over 200 percent will not serve to maintain total market access for MFN bananasuppliers. In fact, it will have exactly the opposite effect. One study estimates that a 230 euro tariffwill reduce banana exports from Latin American suppliers by over one-third, resulting in lost incomeof about $400 million per year and over 75,000 job losses. That is not the outcome envisioned bythe United States when we agreed to the Understanding and when we consented to the WTO waiver.

It appears at least some in Europe would concur. A recent report by Sweden’s Ministry ofAgriculture, Food and Consumer Affairs concludes that the final tariff should “reach a level of nomore than 75 euro/ton ....” And according to at least one press report, Sweden’s position is supportedby a number of EU Member States. I very much hope that the Commission will reconsider itsposition and instead honor the commitment to introduce a final tariff rate that will at least maintaintotal market access for MFN banana suppliers.

Third, I am quite dismayed by the Commission’s most recent decision to initiate a new WTO caseagainst the sanctions we imposed in response to the EU’s ban on imports of U.S. beef treated withgrowth hormones. Apparently the Commission claims that, by changing its regulation from apermanent ban on six hormones to a provisional ban of indefinite duration on five hormones andcontinuation of the permanent ban on the sixth, the EU is now in compliance with its WTOobligations. Regardless, the EU’s ban on beef treated with growth hormones remains in place. Andthis new version of the ban isn’t backed by sound science any more than the old ban that was ruledillegal by the WTO. Instead, the new ban appears to be backed by “political” science. This exercisein smoke and mirrors sets a poor example. By replacing one scientifically unfounded ban withanother and claiming compliance, the EU significantly discredits the DSU. And in the meantime,beef producers in my home state of Iowa and across the United States will continue to be injured,while consumers in Europe will continue to be denied access to high-quality beef. That is hardly athoughtful and effective way to resolve a dispute that has been left outstanding for far too long.

I appreciate your acknowledgment of my efforts with respect to FSC/ETI. I’ve worked hard for overtwo years to bring the United States into compliance with the FSC/ETI decisions. During that timeI’ve heard some in Europe berate the United States for a lack of commitment to the multilateraltrading system. And quite frankly, I’m left frustrated. Because after completing this tremendouslegislative effort with respect to FSC/ETI compliance, it seems that we’re right back where westarted before Doha–facing the prospect of continued litigation and increasing tension over beef,bananas, and FSC. That is unfortunate. For instead of looking ahead together to the substantial workthat remains to bring the Doha Round to a successful conclusion, the Commission’s actions divertprecious energy and resources on both sides of the Atlantic, over issues that should have beenresolved long ago. Nevertheless, I intend to engage your successor in an effort to minimize thesedistractions and advance a positive trade agenda, both bilaterally and multilaterally, over the comingyears.

Sincerely yours,

Charles E. Grassley